Be aware of the consequences of negotiating an early break right
in a renewal lease. The flexibility that this might bring will come
at a cost. On a 1954 Act lease renewal, the court has power to
determine the rent for the renewal lease. The Court assesses the
rent for which those premises "might reasonably be expected to
be let in the open market by a willing lessor" (Section 34 of
the Landlord and Tenant Act 1954).
In the case of Britel Fund Trustees Limited v B&Q
plc, the question of the rent was the only issue outstanding
in the lease renewal. The subject premises in this case was a DIY
warehouse in Tottenham. The rent paid at the end of the old lease
was £776,139 pa.
The parties had agreed the new lease would have a rolling break
after a short period which could be exercised on just six
Two questions arose, which are of interest to those of us
involved in negotiating (and litigating) lease renewals.
Whether any allowance should be made
for a three month rent free period. The court took this point
fairly quickly and followed recent court decisions where such rent
free periods have been accepted as the norm to allow for some of
the hypothetical fit out costs. It therefore applied a discount to
the rent of 2.5%, applying the rent free period over the ten year
term of the lease.
What was the impact of the break
clause on rent? Initially both parties agreed the way forward was
to ascertain the open market rent to a DIY retailer tenant and then
discount that to take the break clause into account. The
landlord's expert said that would make the rent £698,500
and the tenant's expert said it would be £281,000.
Naturally the parties' discounts differed. However, this was
immaterial in the end because the experts went on to concede, in
Court, that actually no DIY retailer would take a lease with such a
potentially short term. The tenant argued that the only potential
tenant would be a discounter.
The court agreed with the tenant, but as the experts only
conceded in Court there was no comparable evidence available to the
court at such a late stage to assist in calculating what the market
rent should be. The court, did what it could with the information
available, and found that the market rent payable by a DIY retailer
would be £603,100 and by a discounter £466,940. A
discount then had to be applied to take into account the break
clause. Ironically, the discount for a discounter would be less
than for DIY retailer, because of the nature of its business and,
in the absence of comparables, the court held that the discount
would be 20% for the discounter and 25% for DIY retailer. This took
the rent to just £373,700 from the £698,000 the
landlord had been requesting.
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